Recently, the Finance Director has attended a workshop about life-cycle and target costing and she suggested the use of these techniques before making the final decision about the project. So, the management accountant was asked to conduct further research and provide the additional information required for applying these techniques. Doing so, the management accountant has come with the following information: 

 

Forecasted number of pairs of boots to be made and sold:

 

Year 1        4,500

Year 2        4,750

Year 3        5,000

 

The suggested selling price is to be £60 per pair of boots in the first year, rising in line with inflation which is currently expected to be 4% per annum.  

 

Variable production costs are expected to be £33 per pair of boots in year 1 and this consists of £20 cost of material, £8 cost of labour and £5 other variable costs, however, these types of costs are expected to increase by 4%, 3% and 2% respectively per annum. 

 

For the first year, fixed costs of maintenance are correctly forecast at £40,000 and other production overheads are expected to be £35,000 with both these costs being subject to inflation at 2% per annum.

The marketing cost is estimated to be £10,000 in the first year, falling by £3,000 per annum in each of the next 2 years.

 

The profit margin on safety boot is at 30% and Tudor Ltd would expect the profit margin to be achieved by the third year of production.

 

Required:

1) Using the additional information provided by the accountant only, calculate the cost gap per unit for each of the first three years of the products life and discuss the implication of this on the ability to achieve the required profit margin of 30%.  

2) Define the Business Process Re-engineering and explain how it can help Tudor Ltd with cost reduction and meeting the target cost relating to the new production under consideration.  

3) If a decision was made to proceed with the product, advise how Kaizen costing would help to achieve the required 30% margin